Having lived in Beijing for almost two decades now, I've learned a thing or two about China and doing business in this incredibly fast-moving country. I authored "Managing the Dragon: How I’m Building a Billion Dollar Business In China," and am a frequent speaker and commentator to the broadcast media and a variety of audiences worldwide, including: CNN, CNBC, Fox, BBC, NPR, CCTV, universities, business schools, corporate and industry conferences, the Council on Foreign Relations, Asia Society, YPO and other professional organizations. I also provide timely insights into ongoing developments in the country at www.managingthedragon.com. In 1994 I founded ASIMCO Technologies, which became one of the most important companies in China’s automotive components industry. In 2009 I decided to combine my experience in China with the skills I learned as an investment banker on Wall Street and founded JFP Holdings, where I am currently the Managing Director.

Winners And Losers In China's Passenger Car Industry

Cars line up as they stop at traffic lights on a street in Shanghai on January 9, 2012. US auto giant General Motors said its sales in China hit a record high in 2011, and major US auto maker, Ford Motor Co also said that its sales in China broke the half-million mark in 2011 despite a broader slowdown in the world's largest vehicle market. (Image credit: AFP/Getty Images via @daylife)

For the first 10 months of 2012, a total of 10.8 million passenger cars were sold in China, up 7.6 percent from the comparable period last year. China is now, by far, the largest passenger car market in the world, and given its size and importance, investors want to know: “Who is winning and who is losing in the country?” In 2012, new answers to these questions are beginning to emerge.

In the most recent month, just over 1.1 million passenger cars were sold, up 5.3 percent from the number of units sold in October 2011. However, this seemingly benign increase belies dramatic changes in fortune that took place during the month. Monthly sales of Japanese cars plunged 54 percent year on year, while sales of passenger cars, excluding the Japanese brands, rose 23.8 percent.

As illustrated by October’s numbers, the biggest losers so far in 2012 have been Japanese automakers. Whatever one thinks about the relative merits of each country’s position with respect to the Senkaku Islands, there is no question that the dispute between China and Japan is taken seriously on the mainland, and consumer sentiment against all Japanese products, including cars, has been strong and marked by sometimes violent protests. How long this will last is anyone’s guess. Chinese consumers like Japanese technology, but feel strongly about the territorial dispute that is playing out in the East China Sea.

Japanese car companies are bracing for the worst. According to internal documents, Toyota Motor Corporation (NYSE:TM) believes that Japanese automakers are unlikely to fully restore Chinese production before July of next year.

In terms of market share, the recent tensions between China and Japan have exacerbated the market share declines that Japanese brands have suffered over the past five years. In 2008, the market share of Japanese brands in China’s passenger car market peaked at 30.6 percent. As a result of the recent demonstrations, Japan’s market share has declined by more than two percentage points since the beginning of the year, and now stands at 21.1 percent.

European brands, led by Volkswagen (Frankfurt:VOW.F), have done well, increasing in market share from 21.4 percent to 25.5 percent at the end of October. Similarly, American companies, led by General Motors Company (NYSE:GM), have shown a nice increase from 11.7 percent five years ago to 15.5 percent today, and the Korean companies have increased their market share by over two percentage points over the past five years to 9.8 percent currently.

While the European, American and Korean car makers have all gained market share in 2012 at the expense of their Japanese counterparts, the biggest beneficiary in the long term may be Chinese companies.

In October, sales of the local brands grew by 16 percent year on year. The SUV segment, which was up 52 percent during the month, was the growth driver for the local players, with the big winner being Great Wall Motor Company Ltd. (Hong Kong: 2333.HK), which registered a 76.9 percent increase in unit sales.

Ever since peaking at 30.9 percent in 2009, the share of passenger cars accounted for by the local car makers has been declining in the face of increased competition from the global brands, a decline which carried over into 2012 — until September that is. After falling from a 36 percent market share in January, to a low of 26 percent in August, the market share of the local car companies has recovered to 33 percent in the month of October. Among the larger players, Great Wall, Shanghai Auto and Geeley are all showing healthy increases this year.

It’s difficult to draw any hard and fast conclusions from the recent data, but a couple of observations can be made. First, it is clear that the Japanese assemblers will face strong headwinds in China in the coming year. Second, while the Chinese car companies seemed in danger of relinquishing their leadership position in market share to the Europeans based on sales through August, the recent dispute with Japan has enabled them to reverse this trend. Only time will tell whether they can consolidate these gains.

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